LBO and private equity interview questions: 28 real questions

001In one or two sentences, what is a leveraged buyout?

core

• Why would management ever want to be bought out this way?
• What's the single biggest risk of that much debt?

002You are handed a paper LBO in an interview. What is the format, what is the interviewer actually testing, and how do you structure your approach?

core

• What quick mental shortcuts do you use to convert a money multiple over N years into an approximate IRR?
• If your rounded answer comes out to a 1.9x multiple, is it acceptable to say 'about 2x'? Where is the line?

003Walk me through an LBO and why leverage boosts returns.

intermediate

• Of the three return drivers, which do PE firms actually underwrite?

004What makes a good LBO candidate?

intermediate

• Why is high CapEx a problem for an LBO?

005Why do acquirers pay a premium, and what types of synergies justify it?

intermediate

• Why does the market trust cost synergies more than revenue synergies?

006A PE firm doubles its money in 5 years. Roughly what IRR is that?

intermediate

• Same 2x but in 3 years, IRR?
• Why do PE firms care about IRR vs MOIC?

007What are 'sources and uses' in an LBO?

intermediate

• Where do transaction fees sit and how are financing fees treated afterward?

008Why do PE firms live on EBITDA rather than net income?

intermediate

• When is EBITDA most misleading?

009What is carried interest, and how does a typical distribution waterfall work?

intermediate

• Why does the preferred return exist, what problem does it solve for LPs?
• What's a clawback provision and when does it trigger?

010A PE firm triples its money in 4 years. Approximate IRR via a mental-math shortcut, and how far off is the shortcut?

intermediate

• Same question but quadrupling in 4 years? (Rule of 144: 36%; exact 4^(1/4)−1 = 41.4%, gap widens to ~5.4 points)
• Why does the interviewer care that you know it's an approximation?

011What are the three main workstreams of PE due diligence, and what does each actually check?

intermediate

• Give me an example of a QoE finding that would kill a deal.
• Which workstream do you weight most for a founder-led business?

012Walk me through what happens to a leveraged portfolio company when EBITDA falls sharply in a recession. Why does leverage amplify the damage?

intermediate

• What options does a sponsor have when a covenant breach is imminent?
• What is a covenant-lite loan, and how does it change this dynamic?
• Given this risk, why do lenders agree to fund cyclical deals at all?

013What are the three fundamental drivers of equity returns in a leveraged buyout, and which of them do sophisticated investors consider the highest quality? Why?

intermediate

• Why does leverage amplify losses as well as gains? Illustrate the downside case conceptually.
• If a deal's returns come entirely from debt paydown with zero EBITDA growth, what does that imply about the business, and would a sponsor like it?

014A long/short equity fund manages $100M of investor capital. It holds $130M of long positions and $50M of short positions. What are its net exposure and gross exposure, and roughly what should happen to the portfolio if the market rises 10%?

intermediate

• If the same fund instead ran $100M long and $100M short, where would its returns come from, and what would its leverage be?
• Why does gross exposure still matter for risk even when net exposure is zero?

015In a paper LBO, you compute exit enterprise value as exit EBITDA times the exit multiple. How do you get from there to the sponsor's equity value at exit, and what simplifying assumption do you usually make about the company's cash flows during the hold?

intermediate

• If the company hoarded the cash on its balance sheet instead of repaying debt, would the exit equity value change in this simplified framework? Why or why not?
• If the sponsor paid a takeover premium to win the deal, where would that premium show up in the paper LBO?

016A sponsor acquires a business for $200M and exits five years later at the exact same $200M enterprise value. The deal was funded with 75% debt and 25% equity, and over the hold the company's free cash flow repays $100M of debt. Can the fund still reach a typical 20-25% IRR target, and what are the numbers?

intermediate

• Now assume the entry and exit multiples are identical AND no debt is paid down at all. What is the only remaining way to hit the return target?
• Why does aggressive leverage amplify this effect, and what is the downside symmetry?
• If the exit took 7 years instead of 5 at the same 3.0x MOIC, roughly what happens to the IRR?

017Your fund underwrites deals to a 20% IRR over a 4-year hold. The model projects exit equity proceeds of $400M. What is the maximum equity check the fund can write today, and how would you extend that into the maximum purchase price?

intermediate

• Why do modeling-test graders penalize solving this with Goal Seek instead of a formula?
• What deal features break this simple algebra?
• If the target IRR rises to 25%, does the affordable price go up or down, and roughly by how much directionally?

018Your MD says a deal only works if you assume two turns of multiple expansion at exit. Why is that a red flag, and what should the underwriting rest on instead?

intermediate

• When might underwriting some multiple expansion actually be defensible?
• Entry is 10x on $100M EBITDA with $600M of debt. Exit at 8x in year five: what EBITDA do you need just to double the equity, assuming $200M of debt paydown?
• How does this discipline change in a rising-rate environment?

019A company with $200 million of EBITDA is levered at 2.5x. It refinances up to 3.5x total leverage; as part of the deal, the rate on all existing debt drops by 150 basis points, and the incremental debt is priced at 6.0%. What is the net change in annual interest expense?

intermediate

• With a 25% tax rate, what is the after-tax hit to net income?
• Why might a company deliberately take on higher interest expense like this - what are they doing with the incremental $200 million?
• What does 'one turn of leverage' mean in dollar terms, and why do practitioners quote debt that way?

020In an all-stock deal, when is the acquisition accretive to the acquirer's EPS?

advanced

• Does accretion mean the deal creates value?

021Buy at $500M with 60% debt. Exit year 5: EBITDA grew $50M → $80M, same 10x multiple, $150M debt left. Equity multiple and rough IRR?

advanced

• How much of the return came from leverage vs operations?

022What's a dividend recapitalization?

advanced

• Why does an early dividend help IRR even if MOIC is unchanged?

023In accretion/dilution, how does cash versus stock consideration change the analysis?

advanced

• Rates just rose 300bps, how does that change cash-deal accretion math?

024Walk me through the typical LBO debt stack.

advanced

• What's covenant-lite and why did lenders accept it?

025How much debt can an LBO support?

advanced

• Rates rise 300bps, walk through what happens to max leverage.

026Do a paper LBO: $100M EBITDA bought at 8x, 60% debt. EBITDA reaches $130M by year 5, exit at 8x, debt paid down to $200M. Returns?

advanced

• Same deal but exit at 7x, roughly what happens to MOIC? (910−200=710... wait, 7×130=910; equity 710; ≈2.2x)

027Two funds both target 20% net IRR. Fund A returns capital in 3 years; Fund B returns the same multiple in 6. Which is better for an LP, and why doesn't IRR alone tell you?

advanced

• How does a dividend recap improve IRR without changing MOIC?

028Paper LBO with a full cash flow build: a sponsor buys a company for 8x its $30M LTM EBITDA, funded 50/50 debt and equity. EBITDA grows $2M per year, CapEx is $10M per year, there are no taxes and no working capital needs, and the debt carries 5% interest (assume interest stays constant on the original balance). All free cash flow repays debt, and the exit after 5 years is at the same 8x multiple. Walk me to the MOIC and approximate IRR.

advanced

• Which simplifying assumptions should you state out loud before diving in, and why does verbalizing them matter?
• How would a 25% tax rate change the mechanics of your build?
• Why is it reasonable to assume exit multiple equals entry multiple when the prompt is silent?